Edited version of private advice

Authorisation Number: 1051542832134

Date of advice: 23 July 2019

Ruling

Subject: Income tax: capital gains tax: small business concessions: active asset

Question 1

Does the property held by Individual B satisfy the active asset test in accordance with section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does the property previously held by Individual A satisfy the active asset test in accordance with section 152-35 of the ITAA 1997?

Answer

No, the property previously held by Individual A does not satisfy the active asset test in accordance with section 152-35 of the ITAA 1997.

Question 3

Do you qualify for the small business active asset reduction in accordance with section 152-205 of the ITAA 1997?

Answer

Yes, the Commissioner is satisfied that you are entitled to the small business active asset reduction for any capital gain made on the sale of the CGT assets identified as passing the active asset test.

Question 4

Do you qualify for the small business retirement exemption in accordance with section 152-305 of the ITAA 1997?

Answer

Yes, the Commissioner is satisfied that you are entitled to the small business retirement exemption for any capital gain made on the sale of the CGT assets identified as passing the active asset test.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Individual B is over the age of 55.

The property compromises several Certificates of Title.

The ownership of the property was previously registered to Individual A and Individual B as tenants in common.

On 1 Month 2xx1, the ownership of the property was registered to Individual B.

Prior to 1 Month 2xx2, the entire property was used by a related small business entity in its business.

On 1 Month 2xx2, some of the property was leased to an unrelated third party.

Individual B sold the property on 1 Month 2x18.

The land continued to be leased to an unrelated third party until its sale.

You satisfy the Maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-305

Reasons for decision

The small business concessions only apply where the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

This test requires that the asset has to be an active asset for at least half the overall period of ownership. However, that overall period is subject to a cap of 15 years.

The term active asset is defined in subparagraph 152-40(1)(a)(i) of the ITAA 1997 and requires the asset to have been used, or held ready for use, in the course of carrying on a business by you either alone or in partnership. However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset.

Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 for assets whose main use is to derive rent provides the following:

22. Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term 'rent' has been described as follows:

·                    the amount payable by a tenant to a landlord for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99);

·                    a tenant's periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne); and

·                    recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments........ The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212).

23. A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

In strict legal terms, a lease is a contract where one party (the lessor) conveys exclusive possession of some property to another party (the lessee) for a period in exchange for some form of consideration. This also applies despite the lease containing conditions with which each party must comply.

Retirement exemption conditions

If you're an individual, you can choose to disregard all or part of a capital gain if:

·         you satisfy the basic conditions for the small business CGT concessions

·         you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

In your circumstances

As the ownership of each of the Certificates of Title were held as tenants-in-common, each of these ownership interests are a separate CGT asset. Each asset is considered separately when assessing whether it is an active asset.

For the share of the land always held by Individual B, the ownership period of the CGT assets commenced more than fifteen years ago. For at least seven and a half years, the land was used in the business of a related small business entity and accordingly, is an active asset.

When considering the length of the ownership period, the commencement date for the land that was previously held by Individual A only commences from the date Individual B held it entirely. This date was 1 Month 2xx1 and the land continued to be held for more than fifteen years.

On 1 Month 2xx2, Individual B granted an unrelated third party exclusive possession to some of the property. Accordingly, that share of the property ceased being used in the business of a related small business entity from that date. Its main use was now to derive rent and no longer satisfied the definition of an active asset in section 152-40 of the ITAA 1997.

As the land that was acquired from Individual A was an active asset for less than seven and a half years, that land does not meet the active asset test in section 152-35 of the ITAA 1997.

On the properties that are eligible active assets you may also apply the retirement exemption on the remaining gain up to your lifetime limit of $500,000. You must keep a written record of the amount you chose to disregard. As you are over 55 years of age there is no requirement to pay any amount to a complying super fund or retirement savings account.

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